26 Aug A Game Of British Bulldog ?

A Game Of British Bulldog ?

When I was in primary school we used to play a game known as “British Bulldog” or “Red Rover All Over”. Some of you may remember this game as well, where one or more people stand in the middle, whilst the other players run from one side to another until they are tagged or caught. The game was generally played by us on asphalt recess yards & from time to time it was not unusual to be bruised & battered, or having torn clothing or scuffed shoes from playing the game (Sorry Mum !!!)

Investment markets can behave like this from time to time as well, especially in periods on heightened volatility, where selling begets more selling, or a period of effectively “piling on” & individual investors feel a bit battered & bruised from the results. We saw this earlier this week in the USA where their Dow Jones Index opened up over 1,100 points down on Monday, was up 440 points Tuesday, but ended up down 200 points at time of closing.

A lot of trading nowadays is completed via computer based algorithmic systems, which in recent times have been supplemented by what is known as high frequency traders (trading large number of transactions over very short periods). This sort of new age technology can cause intraday large anomalies in the market prices of companies

For example on Monday shares in the US listed company General Electric Co, which pays a dividend of approx. 4% pa & has a market capitalisation of $US240 billion ($330 billion AUD ), fell 20 per cent (US$48bn or AUD$66bn) in the space of a few minutes on Monday but ended the day down only 2.9 per cent? (US $7bn or AUD$10bn). This would be like Commonwealth Bank opening up today (26/8/15) at $43 & closing the day at $70 – pure madness !!!

Why The Sudden Volatility ?

Sometimes there is no specific rhyme or reason, just everyone heads for the exits (or their computer based algorithm does the same for them). Markets over the past 3 years or so have been reasonably bereft of any major volatility events, so for some people this causes periods of angst.

The recent story is Chinese economic growth is not going to be as strong as what some people were expecting. Whilst you hear stories about China’s economy “slowing” (from a level of 7% back to say 6% economic growth) it is still providing greater levels of economic activity year on year, with more emphasis now being on internal consumption, rather than external exports. I only need to refresh everyone’s memory from my April 10 2012 Blog (The Asian Tiger Still Roars)

“China in the future will look to re-balance their economy, to one that is driven by more domestic consumption & away from relying only on export driven markets & investment in capital intensive fixed assets. Over the past 10 years China has invested billions of dollars into high speed railways & road expressways, with particular investments being made into the centre of the country, away from only the larger coastal zones. On top of this China is looking to make investments that are sustainable and promote clean energy sources. More emphasis is being made on the quality of the economic growth being achieved, rather than merely focusing on growth for growth’s sake. Whilst there will always be speed bumps & hiccups along the way, the Chinese miracle is a long way from ending yet”.

Well guess what – this is exactly what China is doing, yet some people panic when they see a lower number than what they expect. Better than listen to me look at some of the comments from one of Australia’s most pre-eminent business chiefs this week

ANZ chief executive Mike Smith said
“I think the fundamentals in Australia are still pretty sound,” Mr Smith said at an event organised by the Male Champions of Change, which advocates for gender equality. Global growth is still OK, it’s still positive. The US economy is probably looking as good as it has done for some time. Europe is a bit slow but it’s better than it was and I think the Greek issue is just being managed and China, look, that was a correction that had to happen and I don’t think there’s any surprise in that. But fundamentally, looking at the medium and long term China has still got huge potential and should we be worried about it? I don’t think so. If you look at the fundamentals, you look at some of the yields that are being offered now in terms of Australian stocks, frankly it’s a no-brainer what you’d do.”

What Could We Expect To See Out Of China ?

The Chinese authorities still have plenty of room to ease policy. Further interest rate cuts, reductions in the Reserve Requirement Ratio (which would allow the banks to lend more money) and further currency depreciation are all in play.
Markets should expect further policy easing from the Chinese authorities in the days, weeks and months ahead. China has “more money than we can poke a stick at” so they have plenty of levers to stimulate & support growth in their economy. Remember Head Of The European Central Bank “Super” Mario Draghi’s statement in the European Summer of 2012 (Refer my Blog QE3 & Super Mario from September 17 2012) that He would “Do Whatever It Takes” to save the Euro – well you can bet your last dollar that the Chinese authorities will do the same for the Chinese economy
The other positive for markets is that although the US Federal Reserve has ended its QE program and is expected to begin raising interest rates before year-end (although this is not a “slam dunk” event), both the European Central Bank (ECB) and the Bank of Japan (BoJ) are still undertaking aggressive QE programs and if anything, these asset buying programs could be increased in the months ahead. The scale of the ECB and BoJ QE programs will more than offset the end of the US QE program.

So this is not a time for reckless action, or in my old recess time game of British Bulldog of nominating myself to run from one side to the other, but more a period of rational thoughtful process. In times of heightened volatility options present themselves that are not apparent in times of largesse.

PS – Does the media or investment markets care anymore that a snap election has been called by the Greek Government ?